UK: The LSE Goes Hi-Tech - High Growth Segment Of The Main Market

Last Updated: 18 March 2013
Article by Mark Howard and Jodie Dennis

Introduction

On 13 February 2013, the London Stock Exchange ("LSE") announced its intention to launch a new High Growth Segment of the Main Market. The new platform is aimed predominantly at addressing the needs of fast growing European technology companies with a view to providing such companies with a transitional route to the UKLA's Official List (the "Official List").

"Ensuring that the UK's fastest growing and most dynamic companies have access to equity capital is a priority for London Stock Exchange. The High Growth Segment will provide an additional attractive choice, giving these companies a launch pad for further success." - Alexander Justham, CEO of the LSE

The High Growth Segment (or "HGS") will be a segment of the LSE's EU regulated Main Market. However, issuers will not be required to "list" on the Official List and will not be subject to the UKLA's Listing Rules. The HGS will instead be underpinned by the EU financial services directives (by virtue of being an EU regulated market), the LSE's Admission & Disclosure Standards (the "A&D Standards") and a rulebook for the HGS (the "Rulebook"). The HGS will effectively sit alongside the Exchange's Premium and Standard segments.

On 13 February 2013, along with its announcement, the LSE also published for consultation the draft Rulebook setting out the proposed admission criteria, continuing obligations and details of the Key Advisers.

Admission

The Rulebook states that companies will be eligible for admission of their securities to the HGS of the Main Market provided that certain eligibility criteria are met. The key criteria are set out below.

  • Trading - The issuer, together with its subsidiary undertakings, must be a trading business; investing companies and mineral resource exploration companies will be ineligible.
  • Assets - As with a company applying for a Premium listing, the issuer must control the majority of its assets.
  • Growth - The issuer must be able to demonstrate growth (CAGR) in revenue of at least 20% over the prior three financial years; start-ups will be ineligible.
  • Publicly Held - At least 10% of the number of securities to be admitted must be in public hands. The idea is that the lower free float requirement (compared to 25% for a Premium listing) will make the LSE a much more attractive venue to entrepreneurs and venture/private equity investors when considering their fundraising options. In particular, it is hoped that this lower threshold will encourage technology companies to seek admission in the UK rather than being lured by Nasdaq.
  • Value - The value of the securities in public hands must be at least Ł30 million, the majority of which must be raised at admission.

As with a listing on the Official List, the LSE also requires that (1) there will be a sufficient number of registered holders of the securities admitted to provide an orderly market following admission, (2) the securities form part of the issuer's equity share capital, (3) the securities conform with the laws and regulations of the issuer's place of incorporation, and (4) the securities are duly authorised according to the issuer's constitution (as well as having any other necessary consents).

Unlike companies listed on the Official List, admission to the HGS is restricted to issuers who are duly incorporated, as a public limited company or similar corporate structure, in an EEA State. As mentioned above, the thrust of the policy behind the new segment is offering European mid-sized high-growth companies an alternative to Nasdaq/New York.

We note that the Rulebook also contains additional procedural requirements for admission, over and above those set out in the A&D Standards; however, we do not propose to cover these in this article.

Prospectus

The issuer must publish a prospectus prior to admission which is approved by the Financial Conduct Authority (the successor to the Financial Services Authority) or another EEA State competent authority (allowing the possibility for an issuer to take advantage of the "prospectus passporting" arrangements) in the usual way. Where a company is not already admitted to another regulated market in another EEA State, the competent authority will be the UKLA and the Prospectus Rules will apply in respect of the content requirements of a prospectus.

The prospectus and any notification to a Regulated Information Service ("RIS") at admission are also required to contain a non-binding statement of intent to the effect that the issuer intends to apply for admission to the Official List in the future, reflecting the intended "stepping stone" policy behind the HGS.

Note that in view of the EU regulated status of the HGS, should an issuer wish to issue more than 10% of its share capital in any rolling 12 month period, a further prospectus obligation will be triggered.

Continuing Obligations

In addition to the requirements in the A&D Standards, the Rulebook lists a number of continuing obligations with which issuers with securities admitted to the HGS must comply. There are a number of similarities with the continuing obligations applicable to AIM companies. We provide below a brief summary of the key continuing obligations:

  • Continuing Eligibility - The issuer must comply with the trading and asset eligibility criteria set out above.
  • Advice of Key Advisers - The issuer must obtain guidance from a Key Advisor to assist it with the application of the Rulebook and the A&D Standards where it, or any of its subsidiaries, is proposing to enter into any notifiable transaction or a significant event occurs.
  • Notifiable Transactions - The issuer must notify an RIS as soon as possible after the terms of a notifiable transaction are agreed (being a transaction outside of the ordinary course of business where any percentage ratio is 25% or more). Similar notification requirements apply where the issuer is party to a related party transaction.
  • Reverse Takeovers - Where an issuer wishes to undertake a reverse takeover, it will need to apply for cancellation at, or prior to, the point at which the reverse takeover becomes effective. Following completion of the reverse takeover, the enlarged entity may reapply for admission to the HGS, provided that it satisfies the eligibility criteria.
  • Website Disclosures - From the time of admission, the issuer must maintain a website which contains certain prescribed information about the issuer and its securities, such information should be easily available and free of charge.
  • Corporate Governance - The Rulebook requires that certain additional information be included in an issuer's annual financial report, including (1) details of the corporate governance code to which the issuer is subject and/or which it may have voluntarily decided to apply, (2) a statement as to how the issuer has applied the main principles set out in such code, (3) a statement as to which provisions of such code the issuer has complied, or has failed to comply, with.

The Rulebook also contains rules relating to the requirements for notification to an RIS, cancellation of admission and discipline of issuers.

Key Advisers

A company wishing to have its securities admitted to the HGS must obtain the guidance of a Key Adviser. A list of Key Advisers approved by the LSE will be kept by the Primary Market Regulation Team.

In summary, the role of a Key Adviser is to act as a conduit between the issuer and the LSE, to advise the issuer on the admission requirements and, upon request, to provide advice on certain key transactions (e.g., notifiable transactions, related party transactions, reverse takeovers and placings) after admission. Unlike the relationship between AIM quoted companies and their nominated adviser, a company on the HGS will not be required to retain the services of a Key Adviser at all times and the Key Adviser will not owe duties to the Exchange in relation to their advice. However, in practice, and given that many high-growth companies are likely to be undertaking various notifiable transactions, Key Advisers are likely to agree retainer arrangements.

The rules relating to Key Advisers, including their role, responsibilities and the criteria for approval by the LSE are set out in Annex 3 of the Rulebook.

Why not AIM?

AIM was launched by the LSE in 1995, as a platform to help growth companies raise capital for expansion. AIM is now considered to be the most successful growth market in the world. So why is AIM not considered the most suitable arena for these high-growth companies and why is a new platform being developed by the LSE?

The crux of this lies in the types of companies which the LSE is seeking to attract to the HGS. The segment will predominantly aim to provide a gateway for European mid-size companies, who are perhaps considered too large for an AIM listing and who have longer term aspirations to list on the Official List; one might say the HGS is acting as a halfway house between AIM and the Official List. Moreover, the Exchange has recognised that the 25% free float requirement is a market disadvantage against Nasdaq in particular, with entrepreneurs and venture/private equity backers often wanting to hold on to their stakes for longer in order to deliver fuller returns.

Next steps

The consultation period in respect of the Rulebook closes today (8 March 2013). Subject to the feedback received, the LSE proposes to launch the HGS (and publish the final Rulebook) at some point later this month.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Jodie Dennis
 
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